Ontario Court Has No Power To Extend Period For Setting Aside A Domestic Arbitral Award

In R & G Draper Farms (Keswick) Ltd. v. 1758691 Ontario Inc., the Ontario Court of Appeal recently held that an Ontario court has no power to extend the time for an application to review or appeal from a domestic arbitration award. This is an important decision for anyone involved in arbitrations, especially in light of the short period for reviewing domestic arbitral awards found in most of the Arbitration Acts across Canada and the longer limitation period for seeking review of international commercial arbitration awards.

The Background

The dispute arose from contracts for the purchase and sale of carrots between two Ontario-based farming concerns. The parties submitted their disputes to the Fruit and Vegetable Dispute Resolution Corporation (DRC) for resolution in accordance with the DRC’s mediation and arbitration rules. The arbitrator awarded $58,507.42 to the respondent, ATV.

R & G applied to the Superior Court of Justice to set aside the arbitral award. That application and R& G’s appeal to the Ontario Court of Appeal were dismissed. Both courts held that the application had been commenced outside the 30 day period for applying to set aside an arbitral award under section 47 of the Ontario Arbitration Act, 1991. That Act, like those in many provinces in Canada, is modelled on the Uniform Arbitration Act prepared by the Uniform Law Conference for domestic arbitrations.

The limitation period for applying to set aside an award of an international commercial arbitration tribunal is much longer than that provided for in the Uniform Arbitration Act. Under Article 34 of the UNCITRAL Model Law attached to the International Commercial Arbitration Act of Ontario and similar statute in most other provinces, the period for bringing an application to set aside an arbitration governed by that Act is three months.

The Court of Appeal’s decision in R & G Draper Farms can be summarized as follows:

First: The arbitration was a domestic, not an international commercial, arbitration for the following reasons: both parties had their place of business in Ontario; the carrots were grown, sold by R & G to ATV; processed and resold to R & G in Ontario; the parties had not agreed that the subject-matter of the arbitration related to more than one country; and the dispute was arbitrated in Ontario.

While the DRC described itself and its mandate as international, and while the carrots were bought for shipment to a California customer, those elements did not make the arbitration international. ICAA’s definition of “international arbitration” does not turn on the reasons for or mandate of the organization administering the arbitration process, but rather on the location of the place of business of the parties, the location of the actual arbitration, the place where the obligations are performed and the place the subject matter of the arbitration is connected with. All of those elements were in Ontario.

Accordingly the limitation period in the domestic statute, not in the international statute, applied.

Second: Section 47 of the Arbitration Act, 1991 gave the court no power to extend the 30 day period for applying to set aside the arbitral award. There was no prior decision that supported such a power. Nor does the Act support a judicial discretion to extend the s.47 time period. In other sections of the Act, the relaxation of time periods is contemplated, but no such provision is made with respect to the 30-day time period in s.47.

Discussion

There are several reasons why this decision is important and of concern.

First, there seems to be no good reason to have different time periods for applying to set aside an arbitral award, one dealing with domestic arbitrations and the other with international arbitrations.

Second, a thirty-day period to set aside an arbitral award is quite short. The three month period prescribed under the UNCITRAL Model Law seems to provide a more realistic period in which to absorb the reasons of the arbitral award and make an informed decision about seeking to set it aside. Certainly the three month period in the Model Law is the internationally accepted time period for doing so and there seems to be no good reason to have a different one for domestic awards in Canada.

Finally, in British Columbia, the court has the power to extend the time period in the domestic arbitration statute, including the time to set aside or appeal an arbitral award (which is 60 days in British Columbia, not 30 days). Should the right to seek an extension of the period for setting aside an arbitral award be consistent across Canada?

R & G Draper Farms (Keswick) Ltd. v. 1758691 Ontario Inc. 2014 ONCA 278

Arbitration – Setting aside arbitral award – Limitation Periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                           August 28, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

The Supreme Court Of Canada Proclaims 10 Rules For The Interpretation Of Contracts And The Review Of Arbitration Awards

The Supreme Court of Canada’s recent decision in Sattva Capital Corp. v. Creston Moly Corp. is a remarkable document. It is more than a judicial decision. It is literally a textbook or checklist for the interpretation of contracts and the review of arbitration decisions.

Background

First, the context. Creston agreed to pay Sattva a finder’s fee in relation to its acquisition of a mining property.  The parties agreed that Sattva was entitled to a finder’s fee of US$1.5 million and was entitled to be paid this fee in shares of Creston. They disagreed on which date should be used to price the shares and therefore the number of shares to which S was entitled.  S argued that the share price was to be fixed on one date, and therefore it was entitled to about 11,460,000 shares priced at $0.15.  C claimed that the proper date was the date when the compensation was payable, that the agreement’s “maximum amount” proviso prevented S from receiving shares valued at more than US$1.5 million on that date and therefore that S should receive approximately 2,454,000 shares priced at $0.70.  The parties agreed to arbitrate their dispute under the B.C. Arbitration Act.

The arbitrator found in favour of Sattva.  Creston was denied leave to appeal on the basis that the issue was not a question of law.  The Court of Appeal reversed that decision and granted C’s application for leave to appeal, finding that the arbitrator’s failure to address the meaning of the agreement’s “maximum amount” proviso raised a question of law, and remitted the matter to the superior court.

The superior court judge then dismissed C’s appeal from the arbitrator, holding that the arbitrator’s interpretation of the agreement was correct.  The Court of Appeal allowed C’s appeal, finding that the arbitrator reached an absurd result.  The Court of Appeal also held that the superior court judge was bound by the Court of Appeal’s prior decision. S appealed to the Supreme Court of Canada which re-instated the decisions of the arbitrator and the superior court judge.

Decision of the Supreme Court of Canada

Here are the major pronouncements in the Supreme Court’s decision. They are not listed in the decision in this way but they appear to be the major grounds for the decision.

  1. A contract should be interpreted in light of the surrounding circumstances.

The Supreme Court held that a contract should be interpreted in light of all the surrounding circumstance. Moreover, doing so does not contradict the parol evidence rule. The court said:

“The parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words.”

  1. The interpretation of a contract is a question of mixed fact and law, not a question of law.

The Supreme Court held that, except in the “rare” instances in which an “extricable question of law” can be found, the interpretation of a contract is a matter of mixed fact and law, not a matter of law. The court acknowledged that historically, the determination of the rights and obligations under a contract was considered a question of law. However, Justice Rothstein, speaking for the unanimous court, said that rule should no longer apply:

“I am of the opinion that the historical approach should be abandoned.Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.”

Justice Rothstein said that it “may be possible to identify an extricable question of law from within what was initially characterized as a question of mixed fact and law” but that “courts should be cautious in identifying extricable questions of law in disputes over contractual interpretation.”

  1. Leave cannot be granted to appeal the interpretation of a contract by an arbitral tribunal award if the test for granting leave is “a question of law”

Under the arbitration statutes of most provinces, leave to appeal from the arbitrator’s award can be granted if there is a question of law involved. A strong argument can be made that the whole regime relating to appeals from arbitral awards was premised on the historical assumption that the interpretation of a contract was a matter of law. In Sattva, the Supreme Court held that an interpretation of a contract does not raise a question of law, and so it held that leave to appeal should not have been granted in this case. So in the future, and except in rare instances, a court may no longer grant leave to appeal to determine if the arbitrator was correct in his or her interpretation of the contract.

This decision goes affects much more than applications for leave to appeal. It affects any legal regime relating to the interpretation of a contract. For example, if the parties agree to an appeal on a point of law – and most of the provincial and territorial arbitration statutes allow the parties to do so – now such an agreement will not allow an appeal concerning the interpretation of the agreement.

Accordingly, this decision will require that parties proposing to enter into an arbitration agreement re-think how they express in their agreement the rights of appeal from the arbitral decision. If they intend that the interpretation of the contract by the arbitral tribunal is to be appealable, then it is no longer sufficient for them to provide for an appeal on a question of law. They must now provide for an appeal on a question of mixed fact and law.

In addition, many provincial and territorial arbitration statutes – including British Columbia’s – do not allow the parties to agree to an appeal from an arbitral decision on a question of mixed fact and law, only on a question of law. Under this decision of the Supreme Court of Canada, none of those statutes will now allow the parties to include a review of the interpretation of a contract as a ground of appeal. A whole subject of contract law has potentially been removed from the court’s review.

  1. The test for leave to appeal is “arguable merit”

The Supreme Court of Canada held that the test for a superior court to apply when considering an application to appeal from an arbitral award is “arguable merit.” The test may be described in many different ways using different words, but they come down to these two words.

This test is met if “the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law. In order to decide whether the award should be set aside, a more thorough examination is necessary and that examination is appropriately conducted by the court hearing the appeal once leave is granted.” In the case of legal issues, “the appropriate threshold ….is whether it has arguable merit, meaning that the issue raised by the applicant cannot be dismissed through a preliminary examination of the question of law.”

  1. The court has a residual discretion not to grant leave to appeal

Even if the court considers that the appeal has arguable merit, the Supreme Court of Canada has confirmed that the court has a residual discretion not to grant leave to appeal. Discretionary factors to consider in a leave application include:

o   the conduct of the parties

o   existence of alternative remedies

o   undue delay and

o   the urgent need for a final answer.

However, “courts should exercise such discretion with caution.” If the court finds an error of law and a potential miscarriage of justice, then the discretionary factors “must be weighed carefully before an otherwise eligible appeal is rejected on discretionary grounds.” There should be no double-counting of the relevant factors. For example, “respect for the forum of arbitration chosen by the parties is a consideration that animates the legislation itself and can be seen in the high threshold to obtain leave…Recognition that arbitration is often chosen as a means to obtain a fast and final resolution tailor-made for the issues is already reflected in the urgent need for a final answer.” So this factor should not be counted again in exercising a residual discretion not to grant leave to appeal.

In considering misconduct in relation to this residual discretion, the court said that the misconduct of a party need not be directly relevant to the question of law in issue in the appeal.

  1. The exercise of discretion should be reviewed by an appellate court with deference

The Supreme Court held that a discretionary decision by the court considering an application for leave to appeal from an arbitral award should be reviewed by another court with deference. An appellate court “should not be interfered with merely because an appellate court would have exercised the discretion differently… An appellate court is only justified in interfering with a lower court judge’s exercise of discretion if that judge misdirected himself or if his decision is so clearly wrong as to amount to an injustice.”

  1. The review of an arbitral decision is not by way of judicial review applicable to administrative tribunals

The Supreme Court drew an important distinction between the review of an arbitral decision by a superior court under the statutes applicable to commercial arbitrations, and a review of the decision of an administrative tribunal by way of judicial review. Arbitral review is not judicial review in the latter sense. Appellate review of arbitral awards “takes place under a tightly defined regime specifically tailored to the objectives of commercial arbitrations and is different from judicial review of a decision of a statutory tribunal.” As the court pointed out, “for the most part, parties engage in arbitration by mutual choice, not by way of a statutory process. Additionally, unlike statutory tribunals, the parties to the arbitration select the number and identity of the arbitrators.” Furthermore, in the arbitration statutes of some provinces and territories (like British Columbia, but unlike the arbitration statutes in many other provinces and territories), the court is prohibited from reviewing an arbitral tribunal’s factual findings. However, in the judicial review of administrative tribunals, a prohibition against the review of an administrative tribunal’s factual findings “signals deference” under the Supreme Court’s decision in Dunsmuir v. New Brunswick, [2008] 1 S.C.R. 190.

  1.    The Dunsmuir test may be helpful to the review of arbitral awards

The Supreme Court did find, however, that the standard of review developed for administrative tribunals may be relevant or useful to the appeal or review of arbitral awards. The court said the two systems of review are:

“analogous in some respects. Both involve a court reviewing the decision of a non-judicial decision-maker. Additionally, as expertise is a factor in judicial review, it is a factor in commercial arbitrations: where parties choose their own decision-maker, it may be presumed that such decision-makers are chosen either based on their expertise in the area which is the subject of dispute or are otherwise qualified in a manner that is acceptable to the parties. For these reasons, aspects of the Dunsmuirframework are helpful in determining the appropriate standard of review to apply in the case of commercial arbitration awards.”

In applying the Dunsmuirtest, the Supreme Court said the following:

“In the context of commercial arbitration, where appeals are restricted to questions of law, the standard of review will be reasonableness unless the question is one that would attract the correctness standard, such as constitutional questions or questions of law of central importance to the legal system as a whole and outside the adjudicator’s expertise …The question at issue here, whether the arbitrator interpreted the Agreement as a whole, does not fall into one of those categories. The relevant portions of the Dunsmuiranalysis point to a standard of review of reasonableness in this case.”

  1.    The Court may supplement the reasons of the arbitral tribunal

The Supreme Court of Canada held that, in considering an application for leave to appeal from an arbitral award, the court may supplement the award by its own analysis before undermining the award by finding it deficient. The court quoted from its decision in Newfoundland and Labrador Nurses’ Union v. Newfoundland and Labrador (Treasury Board), [2011] 3 S.C.R. 708:

“even if the reasons in fact given do not seem wholly adequate to support the decision, the court must first seek to supplement them before it seeks to subvert them. For if it is right that among the reasons for deference are the appointment of the tribunal and not the court as the front line adjudicator, the tribunal’s proximity to the dispute, its expertise, etc, then it is also the case that its decision should be presumed to be correct even if its reasons are in some respects defective.” (underling in both decisions)

The Supreme Court proceeded to supplement the decision of the arbitral tribunal by its own reasoning. Having done so, it concluded that the interpretation of the contract by the arbitral tribunal award met the reasonableness standard and upheld the award.

10.   The Leave to Appeal decision is not binding in subsequent hearings

The B.C. Court of Appeal had held that its previous decision granting leave to appeal, and the factual findings in that decision, were binding on the superior court judge and on itself during the subsequent hearings. The Supreme Court held that this was wrong:

“A court considering whether leave should be granted is not adjudicating the merits of the case… A leave court decides only whether the matter warrants granting leave, not whether the appeal will be successful…. This is true even where the determination of whether to grant leave involves, as in this case, a preliminary consideration of the question of law at issue. A grant of leave cannot bind or limit the powers of the court hearing the actual appeal.”

Discussion

This decision has a profound impact on the interpretation of contracts and the appeal and review of arbitral decisions. Some time is required to reflect upon and absorb the decision. The following comments are only a first stab at its full implications.

The decision apparently reduces the authority of the superior court to review arbitral decisions in two respects.

First, it reduces the grounds upon which an existing arbitration agreement may give rise to appellate review: except in rare instances, no leave to appeal on a matter of law may be granted to review the correctness of the interpretation of a contract by an arbitral tribunal, and an agreement providing for an appeal on a matter of law will not encompass such a review.

Second, it reduces the ability of parties to future arbitration agreements to agree on appellate review of the correctness of the interpretation of a contract by an arbitral tribunal; if the applicable arbitration statute does not permit the parties to agree to an appeal on a question of mixed fact and law, then no such appellate review appears possible.

The decision also provides guidance on the practice which applies to applications for leave to appeal from arbitral awards. This guidance particularly applies to the scope of the court’s discretion, the impact of a party’s improper conduct upon the exercise that discretion, the non-binding effect of the leave to appeal decision and the scope of the reviewing court’s entitlement to supplement the reasoning contained in the award. So while the leave to appeal door may have been partially closed by this decision, to the extent that the door is still open the decision clarifies and to some extent broadens the court’s powers to deal with the application.

Sattva v. Creston goes into the first drawer of the Contract and Arbitration tool boxes with a big red sticker on it.

Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53

Contracts – Interpretation of Contracts – Arbitration – Appeal and Review of Arbitral Awards

Discretion – Standard of Review

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     August 10, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

English Courts Enforce An Obligation To Mediate And Negotiate

The articles on this site have often alerted the readers to the hidden dangers of mediation and negotiation clauses in construction contracts. The principle danger is that these sorts of clauses may be unenforceable, for two reasons.

The wording of the particular clause may be drafted in such a way as to create no enforceable agreement to mediate or negotiate.

Or the court may hold that an obligation to negotiate or mediate is too indefinite to enforce as a contractual obligation.

Two recent English decisions hold out the prospect that a clause in an existing contract requiring the parties to mediate or negotiate may be enforceable, at least for some purposes.

In Emirates Trading Agency LLC v Prime Mineral Exports Private Limited, the contract between the parties stated as follows:

“11.1 In case of any dispute or claim arising out of or in connection with or under this LTC … the Parties shall first seek to resolve the dispute or claim by friendly discussion….. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.

11.2 All disputes arising out of or in connection with this LTC shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”)….

The arbitrators held that clause 11.1 did not contain an enforceable obligation but that if it did, it had been complied with – and that the tribunal therefore had jurisdiction.

Mr. Justice Teare of the English High Court held that the obligation to undertake “friendly discussions” was enforceable. He held that friendly discussions to resolve the claim were “a condition precedent to the right to refer a claim to arbitration.” The clause did not require that those discussions continue for four weeks but that a period of four weeks must elapse from the commencement of friendly discussions before arbitration could be commenced.

Justice Tear distinguished other English cases which have held that an obligation to negotiate is not enforceable. He distinguished the leading English case holding that an agreement to negotiate is not enforceable – Walford v Miles, [1992] 2 AC 128 – on the basis that in that case there was no existing contract with an obligation to negotiate in it. In the present case, the obligation to undertake friendly discussions was in the parties’ binding and enforceable contract. He distinguished SulAmerica v Enesa Engenharis [2012] 1 Lloyd’s Reports 671on the basis that in that case, the obligation was to mediate, not have friendly discussions. In Justice Teare’s view, an obligation to mediate could well be unenforceable if the parties were unable to agree on the identity of the mediator or the mediation process. But he could see no good reason why an obligation in an existing contract to have friendly discussions before arbitration was not enforceable. He summarized his views as follows:

“The agreement is not incomplete; no term is missing. Nor is it uncertain; an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute. Difficulty of proving a breach in some cases should not be confused with a suggestion that the clause lacks certainty. In the context of a dispute resolution clause pursuant to which the parties have voluntarily accepted a restriction upon their freedom not to negotiate it is not appropriate to suggest that the obligation is inconsistent with the position of a negotiating party. Enforcement of such an agreement when found as part of a dispute resolution clause is in the public interest, first, because commercial men expect the court to enforce obligations which they have freely undertaken and, second, because the object of the agreement is to avoid what might otherwise be an expensive and time consuming arbitration.”

On the facts, he agreed with the arbitrator that such discussions had occurred.

In Garritt-Critchley v Ronnan, the English High court ordered the defendants to pay costs on an indemnity basis when the defendant accepted the claimants’ offer to settle during trial, but the defendant had failed to engage in mediation after repeated offers by the clamant to mediate during the action.

The four day trial took place in January, 2014. After the trial concluded and while judgment was reserved, the defendants sought the claimants’ agreement to accept out of time the claimants’ pre-trial offer to pay £10,000 and all of the claimants’ costs.

The claimants submitted that the court should order costs payable on a full indemnity basis, instead of the standard scale of costs. The court held that the action was based on questions of fact involving credibility and expert evidence and was a “classic matter” for mediation or negotiation. It described the action as follows:

“This was an action of a fairly typical kind where the allegation was whether a binding agreement had been made or not…. this was essentially a question of fact applying well-known contractual principles, in relation to a contract which did not itself require to be in writing. It therefore, was a very fact intensive and evidence intensive exercise where the court would have to judge the credibility of their witnesses and look at the importance or otherwise of contemporaneous documents and the commercial sense or otherwise of each side’s case. That is classically a case where both parties needed to engage in a risk analysis as to whether their side of the coin would be accepted or not…..The second aspect of this claim was that there was an obvious sliding scale of a compensatory award if the claimants succeeded. This was not an all or nothing case on quantum where the parties would have to agree that if liability was established the obvious amount of damages would be X. This was a case where the services of an expert, therefore a matter of opinion, was required, in order to see what the range of awards would be and as was apparent to me in the course of the trial and the points being taken, the range was really very considerable indeed…. That again is a classic matter where mediation should be considered because there is ample room for manoeuvre within the wide range of possible quantum scenarios.”

The defendants submitted two reasons why it had been justified in not mediating, both of which were rejected by the court.

First, the defendants said they reasonably believed that no settlement agreement would be reached. The court said that it was not “realistic for someone in the position of Mr. Ronnan to say that all the odds are so stacked in his favour that there is really no conceivable point in talking about settlement.” Moreover, “if that had been his view then it is surprising that no application for summary judgment was ever made, which it was not. Of course the reason why it was not is because there was evidence going both sides: both sides were relying on documents and the inferences which could or could not be reasonably drawn there from. So to say “extreme confidence”, does not, in my judgment, seem to be a reasonable position to take.”

Second, the court rejected the proposition that the “considerable dislike and mistrust between the parties” was such that mediation was bound to fail. The claimants had been willing to mediate from the beginning, and acrimony is just the sort of barrier to settlement that a skilled mediator can overcome.

Comments

Canadian courts have not yet determined whether an obligation to mediate or negotiate is enforceable. When they do, the decision in Emirates Trading will be useful to consider on three points whether the obligation should be enforced. According to the decision in this case, the obligation to mediate or negotiate should be enforced if:

1. The agreement is in an existing and enforceable contract;

2. The obligation is stated in common sense terms that a layman can understand; and

3. The obligation contains a reasonable time period during which it may be carried out,        not in the sense that the parties are bound to negotiate throughout that period, but that the period provides them with an opportunity to do so and comes to an end after a defined period so that the parties and the court may know that the period has come to an end.

The decision in Garritt-Critchley is significant for any jurisdiction, like most common law provinces and territories in Canada, which has a loser pay rule in which the court has a discretion to set a higher or lower cost order depending on the parties’ conduct. Under such a rule, the Garritt-Critchley decision says that, in setting the costs to be paid at the end of the proceeding, the court may take into account a party’s failure to negotiate or mediate, in the following circumstances:

  1. The nature of the dispute is such that there was no good reason not to negotiate;
  1. A party’s view that it had a very high probability of winning is no good reason not to negotiate, particularly if that party has not brought a summary judgment motion;
  1. An atmosphere of ill will between the parties or their counsel will not be a reason not to mediate.

Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2014

Garritt-Critchley v Ronnan [2014] EWHC 1774 (Ch)

Mediation – Negotiation – Enforceability – Costs – Limitation Periods – Certainty of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                           July 28, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Can An Arbitrator Decide An Issue Falling Within A Statutory Regime?

The recent decision in Advanced Explorations Inc. v. Storm Capital Corp. dealt with the question of whether an arbitral tribunal has the authority to decide an issue arising out of a statutory regime over which a regulatory tribunal has specific authority. That question is a thorny jurisdiction issue in the law of arbitration. The decision was rendered by Justice Graeme Mew of the Ontario Superior Court who was, until his recent appointment to the bench, a well-known litigation counsel and arbitrator. His decision that the arbitral tribunal had authority to decide the issue is of additional interest due to his experience in the field of arbitration.

Background

Storm Capital (“Storm”) entered into a Finder’s Fee Agreement with Advanced Explorations Inc. (“AEI”) under which Storm was to seek investors for AEI. In the Finder’s Fee Agreement, the parties agreed to resolve “any dispute, difference of opinion or question … touching on this Agreement or any part thereof” by arbitration. The arbitrator’s decision “shall be binding and conclusive on all parties in interest and no appeal shall lie there from.”

One of the investors introduced by Storm to AEI made investments in the company. AEI refused to pay Storm a finder’s fee for the investments. The parties went to arbitration and the arbitrator held that Storm was entitled to compensation. The arbitrator found that there was a nexus between Storm’s introduction and the investments and that the transactions resulted from the introduction and that therefore Storm was entitled to the finder’s fee.

The arbitrator rejected AEI’s argument that Storm was required to be registered as an LMD/EMD under the Securities Actso as to ensure that it would be compliant with the applicable securities laws (the “securities issue”).

AEI then applied to court to set aside the arbitration award and Storm filed a cross-application to enforce it. Justice Mew dismissed the application and granted the cross-application to enforce the arbitration award.

The Decision

There are three important aspects of Justice Mew’s decision.

First, Justice Mew considered AEI’s submission that the award should be set aside as unreasonable. Justice Mew reviewed several conflicting decisions dealing with the question of whether the court has authority to set aside an arbitral award based upon unreasonableness, and in particular the decision of the Ontario Court of Appeal in Smyth v. Perth & Smiths Falls District Hospital (2008), 92 O.R. (3d) 656. In Smythe, the Court of Appeal considered whether the result was “reasonable” as that term has been defined in Dunsmuir v. New Brunswick, even though the parties had agreed that the arbitration would be the final determination of the issue and that there would be no appeal. Justice Mew noted that the Court of Appeal did not identify the source of its authority to review an arbitral award for reasonableness and he agreed with the view, stated by some commentators, that Smyth is “at best ambiguous” as authority for such a proposition. However, he concluded that even if Smyth was authority for an arbitrator’s award to be reviewed for reasonableness, the arbitrator’s award was reasonable for the reasons referred to by him in the balance of his decision.

Second, Justice Mew dealt with AEI’s submission that the arbitrator’s decision was wrong because the arbitrator had relied upon conduct and agreements other than the Finder’s Fee Agreement itself in interpreting that agreement and the arbitration clause in it, even though the arbitrator had found that the Finder’s Fee Agreement was “clear and unambiguous”.
Justice Mew held that the arbitrator had concluded that“ “the context and factual matrix into which the [Finder’s Fee Agreement] was born” was important to understanding the terms of the contract” and looked to a prior agreement for that reason. However, the arbitrator had “anchored AEI’s liability to Storm in the language of the Finder’s Fee Agreement, and at no point did he incorporate a term or condition from a prior contract.” Justice Mew held that “when ascribing meaning to the various terms of the contract, the arbitrator was entitled to take note of the parties’ sophistication and prior dealings with each other.”

Third, Justice Mew addressed AEI’s submission that the arbitrator usurped the role of the Ontario Securities Commission (OSC) and Toronto Stock Exchange-Ventures (TSX-V) by deciding whether Storm was required under law to be registered as a LMD/EMD. This “securities issue” pertained to whether Storm was eligible to receive compensation under the Finder’s Fee Agreement. AEI submitted this issue was “not capable of being the subject of arbitration under Ontario law.”

Justice Mew held that AEI had waived its right to raise this argument by placing the issue before the arbitrator, as it had done, and then not asserting any definitive position before the arbitrator during the hearing.

In any event, Justice Mew held that the arbitrator had the jurisdiction to decide this matter. He applied the principle of “competence-competence” which is well known to arbitration law, namely that an arbitral tribunal has jurisdiction to decide in the first instance what matters are within its jurisdiction. Here, the arbitrator had raised the question of his jurisdiction on the securities issue with the parties, and had implicitly found that he had jurisdiction when he made his award, and any review of that award would be undertaken on the standard of correctness.

Justice Mew then found that the arbitrator had the jurisdiction to deal with the securities issue and that nothing in the Ontario Securities Act(OSA) deprived the arbitrator of jurisdiction. His remarks (leaving out the citations to cases) bear repeating at some length:

“Public policy in Ontario favours respect for the parties’ decision to arbitrate. The Arbitration Act, 1991 is designed … to encourage parties to resort to arbitration as a method of resolving their disputes in commercial and other matters, and to require them to hold to that course once they have agreed to do so……If the legislature wishes to preclude an issue from being the subject of arbitration, it must expressly state this intention…It is not enough that the subject matter over which arbitration is sought be subject to regulation or concern the public order……  AEI is correct that Ontario law establishes a comprehensive regime for the regulation of securities within the province, and that the OSC and the TSX-V are given wide-ranging powers of supervision…..However, no provision in the OSA or other statute was referred to that expressly precludes arbitration on matters of securities law. I also do not read the jurisprudence to evince a public policy that an arbitrator is unable to rule on securities matters…. On the contrary, the securities regulators are not given exclusive jurisdiction to decide questions of compliance with Ontario securities law. For example, under s. 128(1), the Superior Court of Justice may issue declarations on whether a person or company has complied with the OSA and the regulations promulgated thereunder. In addition, certain decisions of the OSC may be appealed to the Divisional Court, and the court on appeal has the power to “direct the Commission to make such decision or to do such other act as the Commission is authorized and empowered to do under this Act or the regulations and as the court considers proper”: OSA, ss. 9(1), 9(5). Private parties may also bring actions to redress injuries suffered from improper securities practices (even though the OSC could bring an enforcement action for the same misconduct): see OSA, ss. 130-138.14. 70.” (emphasis added)

Justice Mew also rejected AEI’s submission that AEI should not be placed in the position of contravening the securities laws of Ontario. The evidenced did not support a finding that AEI would violate securities laws if the finder’s fees were paid. In any event:

“the fact that AEI might have to choose between compliance with the arbitration award and compliance with its regulatory obligations goes to the question, not before the court at the present time, of whether AEI would be held in contempt of court if it refuses to pay. That is a separate matter from the question of whether the arbitrator lacked the jurisdiction, as a matter of Ontario law, to rule on the Securities Issue in the first place.”

On the issue of enforcement, Justice Mew held that, under section 50(3) of the Ontario Arbitration Act, 1991, once he had rejected the grounds for setting aside the award he had no discretion to refuse enforcement of a valid and final non-family arbitration award and he ordered that it be enforced.

Discussion

Each of the three issues addressed in this decision are important, but this comment will focus on the first and third.

The first issue is whether an arbitration award can be reviewed on the grounds of reasonableness. That issue was addressed by me in my blog of November 24, 2012 in which I discussed the Smythdecision. As Justice Mew mused in the present case, one is left to wonder where that authority is to be found. Section 46 of the Ontario Arbitration Act, 1991 sets forth very specifically and at some length the grounds for setting aside an arbitration award. Unreasonableness, or even an error in law, is not found in that section as a ground to set aside such an award. In the case of domestic arbitrations, the reason for that position appears to be clear: in their arbitration agreement, the parties may provide for appeals on matters of law (and fact), and if they do not then they can seek leave to appeal on a matter of law. And under the Ontario Act, they can agree that there shall be no appeals. So issues and mistakes of law are addressed as part of the arbitration process, not for setting aside arbitral awards. If there is an error or law, then the parties can appeal if they have so provided or seek leave to appeal if they have not provided at all, but not if they have specifically agreed that they cannot do so, as in this case.

The concept of review of a tribunal’s decision on the ground of unreasonableness is found in the law relating to the judicial review of the decisions of governmental officers, bodies and tribunals. As Justice Mew noted, there is no apparent source of authority for that sort of review in section 46(1) of the Ontario Arbitration Act, 1991.   Hopefully an appellate court will address this issue again soon.

The third issue is of equal importance: does a regulatory regime imposed by statute preclude arbitration? Here, Justice Mew made two decisions.

First, he held that unless such a statutory regime specifically excludes arbitration or does so by necessary implication, then parties can arbitrate an issue which pertains to their agreement even if it also pertains to the statutory regime of a government regulator. This decision is of considerable importance to persons engaged in businesses which are regulated to some extent or another, which includes just about any business today. For instance, the construction industry is impacted by zoning and building bylaws, and any businesses which hire employees are subject to labour relations statutes. Justice Mew has held that those regulatory regimes do not preclude the parties putting the same issues into their contracts and having them determined by arbitration as between themselves.

The second point is one of illegality. At some point, the dispute issue may involve an alleged illegality under the regulatory regime and the arbitrator may have to decide whether the illegality is so central to the claim being made that no relief should be granted. But that is an issue to be dealt with under the law of contract dealing with illegalities, which is another subject but one which an arbitral tribunal would apparently have no difficulty in determining. And even if the remedy awarded by the arbitrator would enforce an illegality, then the court may not find the respondent to be guilty of a contempt of court if the award is not obeyed. But that does not remove the arbitrator’s jurisdiction to address the issue in the first instance.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed. Chapter 10, part 3.

Advanced Explorations Inc. v. Storm Capital Corp.2014 CarswellOnt 8794, 2014 ONSC 3918

Arbitration – Jurisdiction of the Arbitral Tribunal – Enforcing and Setting aside Arbitral Awards – Illegality – Waiver – Regulatory Regime

 

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                   July 18, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

When May A Mareva Injunction Be Issued To Enforce An International Commercial Arbitration Award?

In Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, the British Columbia Court of Appeal recently considered the use of a Mareva injunction to enforce an award of an international commercial arbitration. The court over-turned the lower court’s decision which had denied that remedy based upon alleged material non-disclosure. In doing so, the court’s remarks add further support for the regime of international commercial arbitration. The court also issued a caution about applying the principles relating to domestic pre-trial injunctions when enforcement is sought of a foreign arbitral award since that award is already a judgment which deserves to be respected as such, subject to the limited objections to enforcement found in the provincial International Commercial Arbitration Acts and their adoption of the UNCITRAL Model Law.

Background Facts

The appellant SFI is an Indian company and the respondent PSM is a Pakistani state corporation. SCI commenced an international commercial arbitration claim against PSM claiming damages for breach of a contract for the sale of iron ore. In June 2010, SFI obtained an award in the arbitration in an amount equivalent to Cdn. $8.6 million. PSM failed or refused to pay the award despite repeated demands for payment. SFI learned that PSM owned a load of coal which was to be shipped out of Vancouver. In April 2011, SFI filed a petition in the B.C. Supreme Court seeking payment of the amounts owed under the arbitral award. Before the hearing of its petition, SFI applied for and obtained an ex parte Mareva injunction restraining the use of PSM’s assets in British Columbia, including preventing the vessel from leaving British Columbia or PSM from disposing of assets aboard any vessel in British Columbia without first paying into court security for the award.

PSM alleged that SFI had wrongly obtained the ex parte injunction. It said that SFI had not explained to the judge who issued that injunction why it could not enforce the arbitral award in Pakistan, and indeed had wrongly told that judge that it would have challenges in enforcing that award in Pakistan. PSM effectively took the position that the award should be first enforced in Pakistan and only then should it be enforced in another jurisdiction. Since SFI had not yet obtained the recognition of the arbitral award from the B.C. court when it obtained the injunction, that injunction was in the nature of a Mareva injunction and a material non-disclosures about the enforcement of the award in Pakistan meant that the injunction order should be set aside, PSM argued.

The motions judge hearing the motion to set aside the injunction agreed. She held that the failure of SFI to properly explain why it couldn’t enforce the award in Pakistan amounted to material non-disclosure and she set aside the injunction.

Decision of the B.C. Court of Appeal

In allowing the appeal, the Court of Appeal undertook a detailed analysis of the law relating to international commercial arbitrations to demonstrate that the premises of the motion judge’s decision were incorrect.

First, the court noted that the enforcement of international commercial arbitration awards is not based on comity arising from a connection of the dispute or arbitral award to the regime of enforcement, in this case British Columbia. Rather, it is based upon an enforcement regime arising from an international treaty – the New York Convention. That regime requires the contracting states to enforce international arbitral awards made pursuant to the laws of another contracting state. And that enforcement is without regard to any connection of the dispute to the enforcing state, a connection which is presumed to exist for the purpose of enforcement, both for purposes of final enforcement and any interlocutory steps toward enforcement. The court said:

“The New York Convention and the enabling legislation in British Columbia recognize an international arbitration award on the same basis as if it were a domestic award originating in this province. The language of the legislation is not ambiguous in this regard. A real and substantial connection is presumed to exist. It would be illogical to ignore this presumed jurisdictional connection for interlocutory purposes, but recognize it for final judgment purposes. The statutory scheme anticipates an action to enforce the award. There are only limited grounds on which the defendant could dispute the award in a recognition action per art. V of the New York Convention and s. 36 of the International Commercial Arbitration Act. I reiterate that I do not see how a real and substantial connection could exist for some but not all purposes in pursuing the claim through to judgment and enforcement…..I conclude that the recognition and enforcement proceeding is akin to a domestic proceeding, and that the judge ought to have approached the application on the basis that it was akin to a domestic proceeding.” (emphasis added)

 

Second, the court said that the decision to issue a Mareva injunction arising from an award of an international commercial arbitration tribunal depends upon the justice and convenience in doing so. The court stated the following principles that should be applied to that decision:

The overarching factor in granting the injunction is whether doing so achieves a balance of justice and convenience between the parties… Depending on the facts of the case important factors may include the merits of the underlying claim, the risk of dissipation of the asset, the balance of convenience and the interests of third parties…In my view, the following factors militated towards a finding that the injunction was properly ordered: first, the merits of SFI’s claim were very strong, approaching certainty given the limited grounds upon which the claim could be defended; second, the assets were about to leave the jurisdiction; third, the debtor had refused to pay the award over the ten months since it had been made; and, finally, damage to the third party could be alleviated, as it was, by SFI’s fortified undertaking…. On the other side of the equation was the presumably significant inconvenience of arresting and detaining a ship with a valuable commodity on board in circumstances where the commodity’s value exceeded the amount of the Final Award. None of these latter factors persuaded the granting judge to decline the injunction application, nor did they factor into chambers judge’s analysis in a decisive way. (emphasis added)

Third, the enforcement of an international commercial arbitration award in one contracting state does not depend upon whether efforts to enforce the award have been made in another contracting state more connected to the party against whom the award was made. The court did say that the efforts to enforce the award may be relevant to a decision by the court to issue an injunction – or might be made relevant by the applicant submitting evidence about those efforts – but enforcement of the award in British Columbia did not necessarily depend upon enforcement first in Pakistan. The court said:

“The availability of enforcement proceedings in Pakistan was not in my view an entirely irrelevant factor. In some cases, but not this one, a strong case might be made out that there was no risk of dissipation because of other available enforcement proceedings. Such considerations may properly be part of the balance of convenience analysis. Where, in my view, the chambers judge erred was in her implicit assumption that there was an onus on the appellant to turn first to Pakistan’s courts because of the parties’ limited association with British Columbia…” (emphasis added)

The B.C. Court of Appeal acknowledged that the availability of enforcement proceedings in Pakistan could be a factor in determining whether a Mareva injuction should be issued. However, the court held that there had been no misrepresentation about the efforts to enforce the arbitral award in Pakistan and that the motion judge had applied the wrong test to that issue:

“[The motion judge] reviewed the appellant’s disclosure through the lens of her erroneous conclusion that the onus was on the appellant to establish it could not enforce the award in Pakistan. As I have already said that is not the test. In any event, the appellant did not say that the award could not be enforced, rather he stated that enforcement would be “challenging” which implies it could have been enforced, but with some difficulty. The analysis should have been directed more to the question of whether considering all the circumstances, it was just and convenient to grant the injunction. The judge’s balance of convenience analysis ought to have taken into account the delay that would accompany enforcement proceedings in Pakistan, as well as the considerable doubt about the enforcement of that part of the award representing interest under Pakistani law…I cannot agree with the chambers judge that the appellant failed to disclose a material fact. The amplified evidence supports the representation that enforcement of the Final Award would be challenging in Pakistan. There is no amplified evidence that materially alters the balance of convenience analysis done by the granting judge.

Discussion

This decision of the British Columbia Court of Appeal provides a strong endorsement of the enforcement regime relating to international commercial arbitration awards. The New York Convention is all about enforcement of those awards. Virtually the sole purpose of the New York Convention is to provide mechanism for the enforcement of awards in signatory countries. Without that enforcement regime, the Convention is nothing.

The proper place of a Mareva injunction in that enforcement process can be a matter of debate. On the one hand, there is an award already, so that the injunction can be seen as a post-judgment enforcement of the award. On the other hand, the award has not been recognized in the state in which it is now sought to be enforced, in this case British Columbia, so that the Mareva injunction can be seen as pre-judgment enforcement.

The British Columbia Court of Appeal effectively neutralized that debate by holding that the real question is not whether the enforcement is pre or post judgment, but whether it is just and convenient to grant such an injunction. In making that decision, the court pointed to a number of factors that are important from the standpoint of international commercial arbitration.

First, under the International Commercial Arbitration Act of British Columbia (and most Canadian provinces) and the UNCITRAL Model Law, the grounds for refusing to enforce the arbitral award are very limited. So the first question on the injunction motion –is there a strong case on the merits? – has to be answered from that perspective.

Second, the applicant for the injunction does not have to prove that the award can or cannot be enforced in another jurisdiction. While the use and availability of other enforcement remedies may be material to the judge’s decision to grant a Mareva injunction, the applicant does not have to prove that it cannot enforce the award elsewhere. This conclusion shows that the system for the enforcement of international commercial arbitration awards is truly an international system. It is not based upon a presumption that the enforcement of the award is tied to any specific jurisdiction.

See Heintzman and Goldsmith on Canadian Building Contracts, (4th ed.) chapter 10, parts 1 and 2.

Sociedade-de-Fomento Industrial Private Ltd. v. Pakistan Steel Mills Corp. (Private) Ltd, 2014 CarswellBC 1499, 2014 BCCA 205 (B.C.C.A.)

Arbitration – International Commercial Arbitration – Enforcement of Arbitral Awards -Injunctions – Mareva Injunctions

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     June 29, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

 

 

Can A CCAA Order Affect The Priority Of Lienholders?

In Mission Creek Mortgage Ltd. v. New Recreations Ltd., the British Columbia Court of Appeal recently held that a lienholder whose liens had been discharged by an order made under the Companies’ Creditors Arrangement Act (CCAA) upon payment of security for their claims did not have any priority over or entitlement to that security.  This decision depended upon the wording of the Order by which the liens were discharged. Accordingly, this decision may alert owners, lienholders and mortgagees to the importance of the wording of orders discharging their liens and the submissions that are made when those orders are made, and may give rise to disputes over those orders in the future.

Background  

New Recreations was the owner and developer of property and obtained mortgage financing from Mission Creek Mortgage.   New Recreation contracted with construction companies for the construction of the project and the construction company registered liens when they were unpaid.  The project was delayed due to municipal bylaw issues. New Recreations ran into financial difficulties and brought an application for creditor protection under the CCAA.

During the CCAA proceedings, Mission Creek Mortgage advanced Debtor-in-Possession (“DIP”) funds to New Recreations. The funds were to be used, in part to satisfy the claims of lienholders which at that time amounted to about $750,000. The liens were discharged pursuant to a court order which provided that a security fund in the amount of $722,162.37 was to be held in trust pending the determination of the validity of the lien claims.

The order stated that:

“4. The cancellation of the Liens against the Property pursuant to the provisions of the Builders Lien Act shall not deprive New Recreations, the respondents, or any other interested party, including secured or unsecured lenders, of the benefits of the provisions of the Builders Lien Act applicable to the Liens, the Security being in substitution for the Property;

5. The Order shall not affect the right of any person to claim that the Liens are improper or defective, or that the filing of the Liens has been improper or defective, nor shall the Order affect any right of any person under the Builders Lien Act;

6. Payment of the Security and the discharge of the Liens shall in no way change the relative priority of all creditors of New Recreations to the Security or the Property, the Security being substitution for the Property. For greater certainty, the secured creditors ….shall maintain any and all rights of priority that may exist to the Security, the Security merely standing in substitution for the Property.”

At the time of the making of this order, counsel for Mission Creek Mortgage said to the motion judge:

“[I]nclusion of paragraph 6 in the notice of application which maintains the priorities in the same manner as they are against the land such that if at the end of the day recovery was not sufficient from the land to pay out my client in full, my client would be in first priority on these funds. Hopefully that won’t be the case, but that’s what I understand paragraph 6 to be doing and on that basis we don’t have an issue with the application.”

Counsel for the lienholders on the motion advised the court they had no position to take on the application and the funds being held in a solicitor’s trust account.

The subsequent development was unsuccessful due to the bylaw problem. Mission Creek Mortgage caused the property to be sold.  The amount due under the mortgage financing was about $19 million and the amount advanced under the DIP financing was about $3.1 million. The amount realized on the sale was about $17.9 million or about $4 million less than the amount owing under the mortgage and DIP financing. The DIP financing was paid back out of the proceeds of sale. The lienholders asserted that their claims to the moneys being held in the security fund took priority over the mortgage and DIP financing.

The motion judge held that the mortgage and DIP financing had priority over the liens.  The motion judge said, in part:

“To interpret the Security Order as now suggested by the Lien Claimants would wholly re-order existing priorities when the clear intention of New Recreations Ltd. and the petitioner as made known by their counsel to the court was directly opposite the position now advanced by the Lien Claimants….I am not prepared to conclude in the face of the Lien Claimants’ silence at the time the Security Order was made, that Sigurdson J. intended the ordering of priorities they now assert.”

The British Columbia Court of Appeal upheld that decision.

The Decision

The lienholders relied upon a number of appellate decisions in Canada to the effect that, when liens are discharged by the provision of security, then the lienholders have an inviolate entitlement to first priority over that security, and that the mortgagee’s priority with respect to interests in the land did not apply to the security fund put in place when the liens were discharged.  The lienholders submitted that “the funds ordered to be held in a solicitor’s trust account are impressed with a first charge in favour of the lienholder appellants in priority to any claim that can be asserted by the mortgagee respondent.”

The Court of Appeal disagreed with the lienholders on this fundamental point. The court held that the order discharging the liens did give the lienholders a priority which they did not have at that time and that the mortgagee had an existing priority which applied to the security.  This conclusion appears to have rested on two points.

First, at the time the order discharging the liens was made, the mortgagee had priority to the liens, the land was worth less than the amount due under the mortgages and therefore there was no value in the land for the lienholders. In that circumstance, the order could not be interpreted to put the lienholders into a priority they did not then have. The court said:

“It must be remembered what the situation was at the time that the initial order of October 28, 2010 was made in the CCAA proceedings. An appraisal of the property expressed an opinion that a sale of the lands would realize less than the amount of the Mission Creek mortgages, but if the development could continue successfully, the property value should suffice to cover all outstanding indebtedness including the liens and another outstanding mortgage. Therefore, at that point in time and also at the point in time when the order of December 6, 2010 vacating the liens upon payment of security was made, there was no prospect of lienholders realizing anything on a present sale of the land…. In order to continue with marketing of the lands, it was necessary that the liens be vacated, hence the proceeding of December 6, 2010 to achieve this. It was the wish of all concerned, the landowner, the mortgagee and the lienholders that the development proceed to fruition so that all outstanding debts could be paid. ….. All parties who were before Sigurdson J. on December 6, 2010 were of a mind to have the development project continue in the hope and expectation that the successful completion of the project would accrue to the financial benefit of all concerned. If, for instance, the mortgagee respondent or any of the lienholders had sought a realization of security at that point in time, financial loss was a near certainty. In these circumstances, the inclusion of the crucial paragraph 6 of the order set forth in para. 9, supra, is entirely explicable.”

Second, the Court of Appeal expressed the view that the order discharging the liens was based upon the particular circumstances and understandings that could be gleaned from the events at that time – including the statements and silence of counsel – and importantly, that the order discharging the liens had been made in the CCAA proceeding. The court said the following:

“If this were a normal builders’ lien situation, the submissions made on behalf of the lienholders would have great force. However, this was far from the normal situation. The order of December 6, 2010 was made in course of the CCAA proceedings and purported to be made under the provisions of that Act and the Builders Lien Act.  Sigurdson J. was the judge dealing with the CCAA proceedings…. I think it is abundantly clear from paragraph 6 of the order made by Sigurdson J., which provided for the removal of the liens and the substitution of a fund as security for the lienholders, that the then extant priorities between the respondent mortgagee and the appellant lienholders would be unaffected by the posting of security to vacate the liens from title to the property. That term of the order is entirely in accord with the expressed wishes of all counsel before the judge. Those counsel included counsel for the lienholders.”

The Court of Appeal was also of the view that upholding the submissions of the lienholders could lead to “mischief and uncertainty in future CCAA proceedings” as the court would be “hobbled in the exercise of discretion to make necessary orders fostering the continuance of the enterprise.”

Accordingly, the Court of Appeal upheld the mortgagee’s priority to the security fund.

Discussion

The impact of this decision depends upon what is the true basis for it.

One view of this decision is that it is a one-off example of how the submissions of counsel at the time of the granting of the original order influenced the proper interpretation of the order. If that is the case, then counsel for lienholders may want to insist at the time of the making of the order that the order DOES entitle the lienholders to priority over the monies placed in trust when their liens are removed.  Normally, this should not be necessary and the effect of the order should be based entirely upon what it says, not the submissions (or silence) of counsel.

Another view would be that this decision is an example of the “super-priority” that can be given to DIP financing during a CCAA proceeding. However, if DIP financing could be given priority over pre-existing lien rights that had actual value at the time of the CCAA order removing the liens, that would cause a severe confrontation between the CCAA and the lien regimes and directly contradict the priority scheme set forth in the builders’ and construction lien legislation.

The third and better view appears to be that this decision is based upon the liens having no economic value due to the priority of the mortgages. Both the motion judge and the Court of Appeal proceeded on the basis that the advances under the mortgages having full priority over the liens.  In effect, the mortgage and DIP financing was given priority equivalent to the prior advances under the mortgage financing, even though the DIP financing was advanced after the work was done and the liens were registered and the liens would normally take priority over that financing under section 32(2) of the British Columbia Builders Lien Act.  The priority accorded to the DIP financing was due to two factors –

-the existence of the CCAA legislation empowering the court to keep the company alive while further business is conducted (in this case, the construction and sale of the project and land) with protection given to the lender who funds that business;

-and the liens having no economic value unless that further construction and sale occurred.

The result in the present case may be entirely due to the existing mortgages having priority over the liens, quite apart from the DIP financing. If, however, the decision is based upon the DIP financing gaining priority over the liens in respect of the security funds, then  the CCAA order was effectively held to be akin to an order under sub-sections 32(5) and (6) of the B.C. Builders Lien Act.  Under those subsections, the court may order that further advances made under a mortgage take priority over lien rights if the court is satisfied that the advances will be applied to complete the improvements and will increase the value of the lands.  However, sub-sections 32(5) and (6) require the court to be so satisfied before the order is granted and the order will expressly state that the further advances are accorded priority over the existing liens. Those requirements were not apparently met in the case of the CCAA order granted in the present case, and the order seems to have said to the contrary namely, that it did not affect the priorities between lienholders and the advances under the mortgages.

The result in this case may not be the same in other circumstances and other provinces. What if the lien rights did have value at the time of the CCAA order vacating the liens? Could that order still give the DIP financing priority over those liens, especially in the absence of the judge considering the factors and stating the priority of the DIP financing in accordance with subsections 32(5) and (6) of the B.C. Builders Lien Act before making the order?   And would the result be the same in Saskatchewan, New Brunswick and Prince Edward Island where the lien legislation states that when a lienholder’s lien is discharged by payment into court, the lienholder has a first charge upon those monies?  This issue was considered in my article dated March 13, 2012.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 11, part 4(l) and (m)

Mission Creek Mortgage Ltd. v. New Recreations Ltd. 2014 CarswellBC 760

Construction and builders liens   –  priority -liens and mortgages-order discharging liens  – Companies’ Creditors Arrangement Act

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                June 10, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

The Supreme Court Of Canada Holds That A Mediation Agreement Doesn’t Preclude Proof That There Was Or Wasn’t A Settlement

The Supreme Court recently released its decision in Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35. In that decision, the Supreme Court dealt with two principles relating to mediations.

The first principle is that settlement discussions are inherently confidential and therefore privileged from disclosure.  This principle is not based on statute law. Rather, it was developed by the courts as part of the law of evidence and is called “settlement privilege.”  There is an exception to that principle. The privilege does not apply when there is a dispute as to whether a settlement was reached. In that case, the parties can lead evidence that is otherwise privileged to prove or disprove the existence of a settlement.

The second principle is that the parties can make an agreement about their mediation and the courts will enforce it.  They can agree that their mediation is entirely confidential. If they do, then neither party can lead evidence about those discussions even when there is a dispute about whether a settlement was reached.

In this important decision, the Supreme Court of Canada dealt with the intersection between those two principles. The court confirmed that the parties can, by agreement, over-ride the common law exception to the settlement privilege and agree that none of the discussions during mediation can be used to prove whether or not there is a settlement.  However, the court held that in the present case the parties had not done so and therefore evidence could be led about what happened at the mediation in order to prove or disprove whether a settlement had been arrived at and if it had, what the settlement was.

Background

Bombardier sued Union Carbide and Dow in Montreal.  Bombardier alleged that Union Carbide and Dow had supplied Bombardier with defective gasoline tanks for the personal watercraft Sea-Doos that Bombardier manufactures and sells. After pleadings were delivered the parties agreed to participate in mediation. The mediation agreement stated that: “Nothing which transpires in the Mediation will be alleged, referred to or sought to be put into evidence in any proceeding.” Both parties alleged that a settlement was reached at the mediation. Dow and Union Carbide said that the settlement was of the world-wide claims of Bombardier, while Bombardier said that the settlement only pertained to the claims in the Montreal action.

Bombardier brought a motion to enforce the settlement and relied upon evidence about what had transpired at the mediation. Dow brought a motion to strike out the evidence about the events during the mediation.  The motion judge struck out that evidence on the ground that it was privilege from disclosure.  The Quebec Court of Appeal allowed the appeal and held that the evidence was admissible to prove whether or not a settlement had been made.  The Supreme Court of Canada upheld that decision.

The SCC decision 

In starting the discussion, the Supreme Court made two important points.

First, the court re-affirmed that there is a common law privilege relating to settlement discussions and that the privilege confers a duty of confidentiality upon those engaged in mediation. This may not be a surprising conclusion but it is an important one. It means that the subsequent discussion about whether events or discussion at a mediation may be proven in evidence starts with the presumption that they cannot. The Supreme Court gave a strong endorsement to the confidentiality of settlement discussions and mediation proceedings. The court said that settlement privilege “promotes honest and frank discussions between the parties, which can make it easier to reach a settlement” and that “encouraging settlements has been recognized as a priority in our overcrowded justice system, and settlement privilege has been adopted for that purpose.”

The exception to settlement privilege is consistent with the privilege. As the court said:  “A communication that has led to a settlement will cease to be privileged if disclosing it is necessary in order to prove the existence or the scope of the settlement. Once the parties have agreed on a settlement, the general interest of promoting settlements requires that they be able to prove the terms of their agreement….. The rule makes sense because it serves the same purpose as the privilege itself:  to promote settlements.”

Second, the Court affirmed that settlement privilege and its exception applies to mediations. The court noted that “a form of confidentiality is inherent in mediation in that the parties are typically discussing a settlement, which means that their communications are protected by the common law settlement privilege.” But the court also said that mediation agreements are subject to the law of contract, not just the law of evidence. That means “that parties can tailor their confidentiality requirements to exceed the scope of that privilege and, in the case of breach, avail themselves of a remedy in contract” and the reasons that parties may “want to protect information exchanged in the mediation process are not limited to litigation.”  The court noted that “mediation contracts often contain strongly worded confidentiality clauses that place limits on the disclosure of communications exchanged in the course of the mediation process. Such clauses have been upheld by courts, though not in a context in which the parties were trying to prove the existence of a settlement.”

The court then set about to apply these principles to the facts of the present case. The court said that, since there was a mediation agreement between the parties, “in principle, there is relatively little that can displace the intent of the parties once it is clearly established.” The real questions were twofold: had the parties agreed to over-rule the exception to the settlement privilege, and if they had, was such an agreement enforceable in the public interest?

The inquiry begins, the court said, with an interpretation of the contract and a determination of whether the parties agreed to a smaller or larger protection than the settlement privilege and its exception otherwise provides. Absent concerns such a fraud or illegality, the parties’ contract should be upheld. Here, the Supreme Court disagreed with the approach of the Quebec Court of Appeal which had placed greater emphasis on protecting the settlement privilege and its exception than on the agreement of the parties.    The Supreme Court held that “it is open to contracting parties to create their own rules with respect to confidentiality that entirely displace the common law settlement privilege.”

But the mere existence of a confidentiality clause, as in this case, does not displace the common law privilege and its exception because the clause and the privilege have different origins and possibly different purposes.  The court said that “the protection afforded by the privilege does not evaporate the moment the parties’ contract for confidentiality with respect to the mediation process, unless that is the contract’s intended effect.” The court noted that Article 9 of the Model Law on International Commercial Conciliation reflects this approach by providing that “Unless otherwise agreed by the parties, all information relating to the conciliation proceedings shall be kept confidential, except where disclosure is required under the law or for the purposes of implementation or enforcement of a settlement agreement.”

The court outlined two mechanisms to resolve the central conflict or tension between the confidentiality clause in the mediation agreement and the exception to the confidentiality privilege.

First, there is a presumption against ousting the exception.  The parties’ agreement must clearly demonstrate an intention to oust the exception before the parties will be precluded from tendering evidence to prove or disprove the existence of a settlement. As the court said:

“where an agreement could have the effect of preventing the application of a recognized exception to settlement privilege, its terms must be clear. It cannot be presumed that parties who have contracted for greater confidentiality in order to foster frank communications and thereby promote a settlement also intended to displace an exception to settlement privilege that serves the same purpose of promoting a settlement. Parties are free to do this, but they must do so clearly.”

Second, the parties may validly provide in their mediation agreement that a settlement agreement is only enforceable if made in writing, at least under Quebec law. The Court noted that article 14.4 of the Civil Code of Quebec allows for this approach by stipulating that “where a particular or solemn form is required as a necessary condition of formation of a contract, it shall be observed.” Whether in a common law province such an agreement would over-ride a subsequent oral settlement agreement has not yet been determined but it seems unlikely that the Supreme Court would countenance different regimes under the two legal systems.

The court then considered the nature of the mediation agreement in the present case and the circumstances in which it was made, to determine if the parties clearly bargained to remove the exception.  The court pointed to three circumstances indicating that they did not.

 First, the parties did not draft the mediation contract or the confidentiality clause contained in that contract. The draft contract was in a standard form prepared and provided by the mediator who provided the draft to the parties on the eve of the mediation. The parties did not amend that agreement in any way before signing it.

Second, there was no evidence that the parties thought they were deviating from the normal incidents of the settlement privilege, including the exception to that privilege.

Third, the written agreement itself disclosed no intention to exclude the exception to the settlement privilege.

In these circumstances the court concluded that the parties:

“had no reason to assume that they were signing away their ability to prove a settlement if necessary…. Absent an express provision to the contrary, I find it unreasonable to assume that parties who have agreed to mediation for the purpose of reaching a settlement would renounce their right to prove the terms of the settlement. Such a result would be illogical.”

Finally, the court observed that the exception to the settlement privilege was a “narrow one” and that on the final hearing of the motion the presiding judge would be empowered to exclude evidence that was not truly directed toward proving or disproving a settlement. In addition, either party might request a confidentiality order or for an order that the motion be held in camera, so that evidence on the motion would not be publicized, although the test to obtain those types of orders is a high one.

Discussion

There are three important lessons to be learned from this decision.

First, parties are entitled to agree in a mediation agreement that discussions during the mediation are not admissible to prove whether a settlement was made during the mediation. Whether it is wise to so agree is another matter but the Supreme Court of Canada has held that it is legally possible to do so.

Second, however, unless the mediation agreement says so expressly or by implication, a confidentiality clause in the agreement will not be interpreted to exclude the parties’ right to lead evidence about conduct during the mediation to prove whether or not a settlement was made.  Merely saying in the mediation agreement that nothing which occurs during the mediation may be put into evidence, or words to that effect, will not stop the parties from leading evidence about the alleged settlement.

Third, if you want to reduce the possibility of a mediation leading to a contested settlement, then state in the mediation agreement that only a written settlement agreement is enforceable.

Union Carbide Canada Inc. v. Bombardier Inc., 2014 SCC 35.

Mediation – Settlement Agreements –  Settlement Privilege – Confidentiality

Thomas G. Heintzman O.C., Q.C.                                                                                 May 19, 2014

www.heintzmanadr.com

www.constructionlawcanada.com

Has The Limitation Period For Constructive Trust Claims Been Thrown Wide Open?

Constructive trust claims are a natural for construction projects. Unpaid subcontractors and suppliers may have improved the land owned by or secured to the owner or mortgagee. But they may have a worthless claim against a bankrupt contractor and may have let the time for filing a construction lien claim pass by. In these circumstances an unjust enrichment claim with a constructive trust remedy may be their last hope.

But what is the limitation period for a constructive trust claim?  In McConnell v. Huxtable, the Ontario Court of Appeal recently held that it is ten years and not the normal two years.  If that limitation period is available for constructive trust claims arising from unjust enrichment, then a lengthy period is available for subcontractors and suppliers to assert claims arising from a building project.

The Decision

The decision arose from a family law dispute. Ms. McConnell and Mr. Huxtable lived together for about 14 years. During that time, Mr. Huxtable bought several houses with his money. When the couple parted, Ms. McConnell knew that she had a potential claim for unjust enrichment and constructive trust. But she did not start her claim until five years later, after the two year limitation period in the Ontario Limitations Act, 2002 had expired but well within the 10 year limitation period in section 4 of the Ontario Real Property Limitations Act.

Ms. McConnell commenced a claim for unjust enrichment in which she asserted a constructive trust remedy over Mr. Huxtable’s houses. Mr. Huxtable brought a summary judgment motion to dismiss the action on the ground that it was commenced outside the two year limitation period in the Limitations Act, 2002. The Court of Appeal agreed with the motion judge that the proper limitation period for the claim was the ten year limitation period in the Real Property Limitation Act.

Section 2(1) of the Limitations Act, 2002 states the Act applies to claims other than those governed by other specific statutes, including the Real Property Limitations Act. Section 4 of the latter statute applies to “an action to recover land or rent” or to “a right to make entry or distress”.  Mr. Huxtable’s argument was that the Real Property Limitations Act applies to claims relating to adverse possession, that the word “recovery” means that the person asserting the claim must have once had possession or title to the land and that a constructive trust claim does not fall within section 4.  The Court of Appeal rejected those arguments and held that the statutory history showed that the legislature intended to leave all claims in relation to land outside the new Limitations Act, 2002, including constructive trust claims.

The Implications of the Decision

This decision may have far reaching implications. The Court of Appeal held that its decision was not based upon the fact that Ms. McConnell’s claim was a family law claim. The court made it very clear that its ruling applies to any claim in relation to land, including a claim for constructive trust arising from unjust enrichment. Conversely, it held that a claim that seeks only monetary compensation falls within the two year limitation period in the Limitations Act, 2002, including a claim for unjust enrichment.  And a proceeding that asserts both a claim against land and a monetary claim falls within the ten year limitation period in section 4 of the Real Property Limitations Act. 

Constructive claims to land may be important for family law but they are equally important for construction law because the potential claimants – subcontractor and suppliers – improve the land involved in the construction project and they can claim that it is unjust if the owner or mortgagee is benefited and they are unpaid.  However, unjust enrichment claims in the construction industry will run into two obstacle: the building contract with the contractor and the construction lien legislation. Both those legal regimes provide a justification for the owner or mortgagee benefiting from the improvement to the land. So if the owner or mortgagee has paid the proper amount to the contractor and withheld the proper amount under the construction lien legislation, it will be difficult for the subcontractor or supplier to successfully assert an unjust enrichment claim.

But there can be circumstances in which such a claim could be made. For instance, in Atlas Cabinets & Furniture Ltd. v. National Trust (1990), 38 C.L.R. 106, the mortgagee assured a subcontractor that it would be paid if it continued to work on the project, even though the contractor was in serious financial condition. After the mortgagee foreclosed on the property, the British Columbia Court of Appeal held that the subcontractor was entitled to a constructive trust remedy over the property, although a monetary remedy was found to be sufficient and was awarded. Based on McConnell v. Huxtable, the limitation period for asserting this sort of constructive trust claim may be much longer than the normal two year limitation period.

McConnell v. Huxtable, (2014), 118 O.R. (4th) 561.

Building contracts  –   unjust enrichment  –   constructive trust  –   limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb                              May 1, 2014

www.heintzmanadr.com

www.constructionlawcanada.com                                                                

Does Competence-Competence Apply To Domestic Arbitration?

Competence-competence is a central principle of international commercial arbitration: the tribunal has the competence to decide its own jurisdiction. This principle is embedded in Article 16 of the UNCITRAL Model Law. For this reason, a court will await the arbitral tribunal’s decision on its own jurisdiction before undertaking a review of that issue, unless the issue is one of pure law or clearly does not involve factual issues.

The competence-competence principle is also found in most domestic arbitration statutes. For example, it is stated in section 17(1) of the Ontario Arbitration Act, 1991. But section 17(2) states that the court may rule on a jurisdictional objection if, within 30 days of the arbitral tribunal making a jurisdictional deision, a party requests the court to do so.

Should the court take the same deferential attitude toward the authority of a domestic arbitral tribunal to determine its own jurisdiction that it does to an international commercial arbitration?  In Ontario Medical Association v. Willis Canada Inc., the Ontario Court of Appeal recently said that it should. In the process, however, the court did not address the second branch of the competence-competence principle and one wonders how that second branch might affect the application of that principle in future cases.

Background

Aviva provides personal and commercial insurance to the members of the Ontario Medical Association (OMA). Aviva and Willis are parties to a broker/agency agreement. Under that agreement, Willis agreed to act as agent for Aviva in the placement of the insurance to OMA members.  There is an arbitration clause in the Aviva-Willis agency agreement. The OMA is not a direct signatory to the Aviva-Willis agency agreement itself.

Under a schedule to that agreement, Aviva agrees to pay the OMA a 2 percent “over-ride” fee on the OMA portfolio. That schedule says that “the parties (inclusive of the Ontario Medical Association)” are to meet to negotiate increases to the fee based on actuarially calculated profit and loss ratios. An Addendum to the Aviva-Willis agency agreement contains an agreement to which the OMA is a party. That Addendum says that the OMA joins in the Addendum as a beneficiary of Aviva’s obligation to pay the over-ride fee and that Aviva will pay the over-ride fee to the OMA, as well as other fees called a Variable Sponsor Fee and a Policy in Force Sponsor fee.

The OMA commenced an action against Aviva and Willis alleging a breach of the obligation to pay the fees to it under the schedule and Addendum. Pursuant to section 7 of the Ontario Arbitration Act, 1991, Aviva moved to stay the action and to require the dispute to be submitted to arbitration. Willis took the opposite position, supporting the OMA’s position that the OMA is not a party to the Aviva-Willis agency agreement and is not bound by the arbitration clause in that agreement.  Willis filed a defence in the OMA’s action.

The motion judge stayed the action, holding that the arbitral tribunal must first decide the jurisdictional issue. That decision was upheld by the Ontario Court of Appeal.

The Court of Appeal’s decision

The OMA argued that the prior decisions applying the competence-competence principle were rendered under the international commercial arbitration statutes adopting the UNCITRAL Model Law (such as the decision of the Supreme Court of Canada in Dell Computer v. union des consomateurs, [2007] 2 SCR 801) and were not applicable to domestic arbitration. The Court of Appeal disagreed for several reasons.

First, it held that the regimes contained in Ontario’s domestic act and Ontario’s International Commercial Arbitration Act did not reveal any difference, or sufficient differences, to justify a different approach to competence-competence under the two statutes.

Second, the past decisions at first instance show that Ontario courts have deferred to the jurisdiction of domestic arbitral tribunals to rule on jurisdictional issues and have stayed actions on that ground.

Third, the Court of Appeal could see no policy basis for distinguishing between international commercial arbitral tribunals and domestic tribunals so far as the competence-competence principle is concerned.

Having made that decision, the Court of Appeal then held that, in any event, the appeal was barred by virtue of sub-section 7(6) of the Arbitration Act, 1991 of Ontario. That sub-section states that “there is no appeal from the court’s decision” under section 7(1).  The Court of Appeal applied the existing case law which has held that if the judge hearing the motion does grant a stay of the action then there is no appeal, but if the court does not grant a stay there is an appeal. In this case, since the motion judge had granted a stay, the Court of Appeal held that there was no appeal.

Comments

The Court of Appeal could have dismissed the appeal based solely on sub-section 7(6) and said no more.  For this reason, the first part of its judgment could be considered to be obiter dicta and not binding in future cases. However, the Court clearly made a conscious decision to deal with the competence-competence issue, and indeed it did so in its decision prior to addressing the sub-section 7(6) issue. So it will be difficult to argue that its decision about competence-competence is not binding in Ontario.

The unusual aspect of this decision is that the Court of Appeal only addressed half of the competence-competence principle. The second half of the principle states that the court can allow the action to proceed if the jurisdictional issue is one entirely of law, or if the questions of fact require only superficial consideration of the documentary evidence in the record (Dell, at paras. 84-85)

This second part of the competence-competence principle is particularly important in relation to whether the contract and the arbitration clause is binding on a third party.  Usually, an arbitration clause is not binding on a third party to the contract, so that if it is asserted that a third party is bound by the contract or the arbitration clause, that issue can be first addressed as a legal issue by the court, and the court is not obliged to allow it to be first addressed by the arbitral tribunal.  Indeed, the issue of whether a third party is bound by a contract is a fundamental issue in court-developed contract law.  Whether a third party is bound by a dispute resolution regime seems like a perfect issue for a court to rule upon, rather than to have this issue first decided by the arbitral tribunal and later, almost inevitably, by a court on a motion to set aside the tribunal’s jurisdictional decision. The Court of Appeal in the present case did not refer to any facts which would make it unsuitable for the court to decide the issue.

The Court of Appeal’s failure to refer to and apply the second branch of the competence-competence principle can be contrasted with its decision in Ontario v. Imperial Tobacco Canada Limited, 2011 ONCA 525.  There, the same court considered whether the court or the arbitral tribunal should consider the jurisdictional issue of whether an agreement containing an arbitration clause was binding on a third party. I dealt with that decision in my article dated August 28, 2011.

The agreement in Ontario v. Imperial Tobacco was a Comprehensive Settlement Agreement (CSA) between the governments of Canada and the provinces and Imperial Tobacco, settling an action by the governments against Imperial Tobacco as a result of cross-border smuggling and releasing the claims in that action.  The CSA contained an arbitration clause. Later, Imperial Tobacco was sued in a class action by the Ontario Flue-Cured Tobacco Growers’ Marketing Board (the Board) on behalf of tobacco farmers who alleged that Imperial Tobacco had unlawfully paid lower prices to the Tobacco Board for tobacco exported from Canada and smuggled back into Canada.  Imperial Tobacco took the position with the governments that the Tobacco Board was an entity claiming through a releasing entity.  Imperial Tobacco argued that the release in the CSA was effective against the governments in terms of certain consequences under the CSA and against the Board or its claim.

In response, the government of Ontario brought an application in the Ontario Superior Court for a declaration that the release in the CSA did not have the effect asserted by Imperial Tobacco. Imperial Tobacco brought a motion to dismiss Ontario’s application on the ground that Ontario’s claim was required to be determined by arbitration.  The Superior Court judge granted the motion and dismissed Ontario’s application, holding that Ontario’s claim must be determined by arbitration.  By a majority, the Court of Appeal reversed that decision in part, holding that the right of Imperial Tobacco to rely upon the release in relation to the Tobacco Board’s action should be decided in court because the Board was not a party to the CSA and therefore would not be heard in the arbitration, and its rights might be fundamentally affected by the determination of the right asserted by Imperial Tobacco in an arbitration proceeding to which the Board was not a party.

Ironically, in Ontario v. Imperial Tobacco, the Court of Appeal did not deal with the issue of whether it had jurisdiction under sub-section 7(6) to hear the appeal. Since the motion judge had dismissed the action and sent the dispute to arbitration, the Court of Appeal had no jurisdiction to make its decision, according to its later decision in OMA v. Willis. And in OMA v. Willis, the Court of Appeal did not deal with the second branch of competence-competence, and in Ontario v. Imperial Tobacco where it did, it arrived at the opposite effective result, namely that the dispute should be heard by the court when the issue involves a third party to an arbitration agreement.

There are differences between the two cases:

In OMA v Willis, the plaintiff (OMA) was the third party which sued both parties to the agreement (Aviva and Willis) in the action. In Ontario v. Imperial Tobacco, the dispute was raised by one party to the agreement (Ontario) and the other party (Imperial Tobacco) apparently did not take the position that the Board was a party to the CSA or had a right to participate in the arbitration. Does the application of the second branch of the competence-competence principle change depending on whether it is a party to the agreement or a third party who is suing in court?  Even if not, would or should it have made a difference if:

OMA had only sued Aviva – would it then have had a greater right to proceed in court; or if Imperial had agreed or argued that the Board was effectively a party to the arbitration – would it then have had a greater right to proceed in arbitration?  Does the second branch of the competence-competence principle depend on whether or not it is clear or admitted that the third party has or doesn’t have a right to participate in the arbitration?

In my article of August 28, 2011, I said that the decision in Ontario v. Imperial Tobacco was just the next chapter in the evolving Canadian story about the principle of competence-competence.  The next chapter seems to have clarified the first branch of that principle but may have turned the second branch into a mystery story.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10 at part 4.

Ontario Medical Association v. Willis Canada Inc. (2013), 118 O.R. (3d) 241 (C.A.)

Arbitration  –  Jurisdiction  –  Motion to Stay  –  Competence/Competence

Thomas G. Heintzman O.C., Q.C., FCIArb                                            April 20, 2014

www. heintzmanadr.com

www.constructionlawcanada.com 

Does An Informal Agreement To Mediate Stop The Limitation Period From Running?

Mediation seems like apple juice:  no harm in taking it and it might do some good. But mediation has a trap: — the limitation period. If a party enters into mediation and lets the limitation period go by, then that’s real harm.

In a number of reported cases, one party to a mediation did exactly that because it entered into a mediation agreement that was not enforceable. When the other party mediated until the limitation period passed, the first party was left without a remedy. That is what happened in Federated Insurance Co of Canada v. Markel Insurance Co. of Canada, 2012 ONCA 218, 2012 CarswellOnt 4051 (Ont. C.A.).

Fortunately, there is protection for this situation in Ontario which is not well known. It is found in Section 11 of the Limitations Act, 2002. By reason of a recent decision of the Ontario Court of Appeal, that protection just improved.

In Sandro Steel Fabrication Ltd. v. Chiesa, the Ontario Court of Appeal held that section 11 applies whenever there is an agreement to appoint a mediator, whether the agreement is formal or informal.  That means that section 11 provides broad and practical protection against the expiry of the limitation period during mediation.

Section 11 states as follows:

“11.  (1)  If a person with a claim and a person against whom the claim is made have agreed to have an independent  third party resolve the claim or assist them in resolving it, the limitation periods established by sections 4 and 15 do not run from the date the agreement is made until,

(a) the date the claim is resolved;

(b) the date the attempted resolution process is terminated; or

(c) the date a party terminates or withdraws from the agreement .”

Five aspects of this section should be noticed:

First, the section does not depend on a contract to mediate, only an agreement to mediate. So the section does not state that the agreement must meet the requirements of a contract, such as consideration, certainty of terms, etc. All there has to be is an agreement to mediate.

Second, and this is the point of the Santro decision, the agreement need not be in any particular form. It need not be a formal written agreement and it need not refer specifically to section 11. The respondent in the Sandro case asserted that section 11 could “only be triggered by express written agreement referencing the specific claim sought to be tolled and, in this case, the alleged agreement to mediate …was void for want of mutual intention to the agreement in all essential terms required by the law of contract.”

The Court of Appeal rejected that submission.  It held as follows:

“… the motions judge made a finding that there was an agreement to mediate the claim resulting from the collapse of the building which included the Sandro remediation damages. This finding is owed deference. Based on the evidence before him, this was a reasonable conclusion. As such, by virtue of s. 11(1) of the Limitations Act, 2002, the limitation period was suspended.”

The motion judge also held that section 11 applied even if there is ambiguity surrounding the existence of an agreement. The Court of Appeal was not prepared to endorse that view, but was satisfied that the motion judge had correctly held that there was an agreement to mediate.

Third, section 11 states with relative certainty the events which terminate the protection against the running of the limitation period. Each of the three events mentioned in sub-section 11 can be determined with objective certainty, and presumably it is the earliest of these events which ends the protection. Section 11 does not provide an uncertain event for the end to that protection, such as the termination of “good faith efforts” to settle as some mediation clauses do.

Fourth, section 11 does not terminate a mediation agreement, only the limitations protection of that agreement. So even if the obligation to mediate under the mediation clause continues, the protection against the running of the limitation clause does not. In these circumstances, once the protection under section 11 ends the party wishing to make a claim must commence the claim within the re-started limitation period even if the obligation to mediate continues.  For this reason, those drafting mediation clauses should use the termination language in section 11 so that there is not a disconnect between the obligation to mediate and the limitation period protection.

Fifth, section 11 provides protection that can be used whenever a decision to mediate is made. The protection does not have to be in the original contract under which the dispute arises, if there was such a contract. Indeed, section 11 could apply to a tort or other non-contractual claim. So section 11 is a convenient protection to use whenever a dispute exists which the parties wish to mediate.

The Sandro decision confirms that there is a safe harbour for mediation against the possibility of the limitation period expiring during the mediation. Any parties contemplating mediation should use this safe harbour carefully, by copying the wording of section 11 into the mediation agreement, or at least into a letter or email confirming the agreement to mediate:  “this confirms our agreement to have an independent third party resolve the claim or assist the parties in resolving it.”

The Santos and Federated Insurance decisions are two of the triumvirate of cases decided recently by the Ontario court of Appeal dealing with mediation and limitations. The third is L-3 Communication SPAR Aerospace Ltd. v. CAE Inc., 2010 ONSC 7133, 2010 CarswellOnt 10046 (Ont. S.C.J.), affirmed 2011 ONCA 435, 2011 CarswellOnt 4543 (Ont. C.A.).  In that case the Court of Appeal held that under the contract in question, mediation was a pre-condition to a cause of action arising, so the limitation period did not commence until the mediation was concluded. These three decisions provide an essential legal framework for the impact of mediation on the limitation period and vice versa.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., chapter 10, part 6

Sandro Steel Fabrication Ltd. v. Chiesa, 2013 CarswellOnt 8520, 2013 ONCA 434.

mediation  –  building contracts  –  limitation period

Thomas G. Heintzman O.C., Q.C., FCIArb                                                               April 13, 2014

www.heintzmanadr.com

www.constructionlawcanada.com